Conference Report: ESG Europe 2012 – Business Critical Sustainability

More than 260 delegates assembled at the Grand Hotel Krasnopolsky in Amsterdam on October 4 for the ESG Europe 2012 conference, subtitled: Business Critical Sustainability. It was the fifth ESG Europe event organised by Responsible-investor.com and the day was kicked off with a keynote interview with Bob Monks, a figurehead of the corporate governance movement.
In a push-back on this year’s ‘shareholder spring’ theme, Monks said he thought a true, durable shareholder revolution would require influential investors like the Gates Foundation, endowment funds like Harvard and Yale, and the world’s biggest index funds to begin engaging with investee companies on governance issues. Link to RI article:
The subsequent plenary session continued reflections on the shareholder spring. Speakers were Bess Joffe, Vice President of Investor Relations at Goldman Sachs, Nicolas Bernier Abad, Policy Officer, DG Internal Market and Services, European Commission, Gavin Grant, Head of Core Corporate Governance at Norges Bank Investment Management, Roderick Munsters, CEO of Robeco and Michael Jantzi, CEO of Sustainalytics.
Munsters made a plea to investors to raise the bar on corporate governance, saying: “We need to take corporate governance to the next level, to get the market as a whole acting … including index platforms and corporate pension funds. There’s a huge task ahead of us, but we need to create the momentum.” Asked if investors already have the tools they need to effect change, he said they did, but that they had to team up and get organised.One panelist suggested that the discussion around shareholder voting rights, particularly the one-share-one-vote notion could be re-framed to speak of ‘equitable’, rather than equal, treatment of shareholders to at least test the assumption of whether different share representation is a good or bad idea.
In his opening remarks, Bob Monks used the example of Citigroup as one where a 55% shareholder vote against remuneration looked to be subsequently ignored by the bank because of the non-binding nature of shareholder votes in the US. However, Michael Jantzi said he understood that Citigroup was now discussing its pay practices with large investors in private suggesting that the vote could have the required impact, albeit away from the public eye.
Bernier Abad from the European Commission said it wanted to dispel some of the “myths” around EU regulation on corporate reporting: “Companies need to provide a ‘whole’ view of their position, that’s the way we’re approaching this,” he said, adding that he liked very much the concept of narrative reporting around social and environmental issues, proposed as a potential development in the forthcoming CSR/corporate reporting directive scheduled to be issued in the coming month alongside a corporate governance directive as part of the latest EU Action Plan.
The morning plenary session was followed by breakout sessions focusing on environment, social and governance themes. The first environment panel featured Jean-Pierre Sicard, Deputy CEO of CDC Climat, Paul Simpson, CEO of the Carbon Disclosure Project,

Alois Flatz, Managing Partner of Zouk Capital and Josephine Bournonville of Aloe Private Equity. Discussion centered on the collapse of the EU Emissions Trading Scheme (ETS) carbon price and the virtual collapse of the Clean Development Mechanism (CDM) and their potential impact on investors. CDC’s Sicard said the organisation had now stopped investing in Certified Emissions Reduction credits and was instead looking at investing directly in green infrastructure. On the governance panel, Thomas Benzmiller, senior vice president at multi-manager Northern Trust, said few asset managers were serious about the governance aspect of ESG: “Ninety per cent will tick the box and say governance is something that concerns them. But when you peel the onion you find that in many cases the policy was written five years ago and has an inch of dust on it.” Governance was being pushed more by asset owners than by asset managers, he said. Martine Menko, Investment Officer at Pensioenfonds Vervoer, a pension fund for the Dutch transport industry, said the fund strongly believed that governance, along with the environmental and social aspects of ESG, were simply common sense that all institutions should abide by: “I hope that at some point we will get away from the title ESG and consider it just another set of factors that affect performance. Each ESG factor can have a financial impact in the medium or long term.” Heidi Finskas,
Advisor, Responsible Investments at KLP, the Norwegian life and pensions company, said it had assembled a team of in-house ESG advisors to work hand-in-hand with portfolio managers. She said KLP voted at the annual meetings of nearly all its investee companies and that its portfolio managers were known for their engagement. Decisions on whether to exclude companies from its portfolios for ethical reasons, she said, were taken by an ethical committee including senior management.Emilie Goodall, Project Manager at the UN-backed Principles or Responsible Investment (PRI), lead a spirited panel about the merits of “impact investing,” including whether the returns justify the efforts and whether it is suited to a broad base of institutional investors. Rekha Unnithan, who looks after Global Social & Community Investing at TIAA–CREF, the US pension fund for academics, said liquidity, the size of the investment and track record were issues that had to be weighed up by institutional investors before deciding to commit: “The reality is that it’s a fairly immature market. As a result, each unit of reward requires twice the work and effort on due diligence.” On the same panel, Phillip Walker, Investment Analyst for Sub-Saharan Africa at OBVIAM, the development finance institution (DFI) spun out of the Swiss Investment Fund for Emerging Markets (SIFEM) in 2011, said institutions should see impact investing as part of their fiduciary duty: “We try to provide a signal effect to the market that this is a great opportunity. What we often see is that investors really do follow up with interest.” However, like Unnithan, Walker said there were only a few institutions currently ‘doing’ impact investing, and others who were being unrealistic about what it could achieve in terms of returns: “Some expect an internal rate of return (IRR) of 20% which is just not feasible.” Professor Harry Hummels, European Liaison at the Global Impact Investing Network (GIIN), said good market returns were possible: “There are some examples where investors can achieve that kind of return, even with the challenges that we discussed. The question is rather whether there are enough opportunities to satisfy a large group of hungry investors, and there the answer is no.” He pointed out that GIIN had attracted many well-known institutions, including Deutsche Bank, Morgan Stanley, JP Morgan, Citibank as well as foundations including Rockefeller and Gates. Harald Walkate, Head of the Corporate Office at

AEGON Asset Management, said that Solvency II, the EU’s new regulatory regime for insurers, was a barrier to growing impact investing, particularly amongst smaller investors, because of the risk and capital charges it applies to the investment type. A separate governance session focused on how companies and investors are communicating and engaging with each other CSR/ESG issues. Christopher Greenwald, Head of Sustainability Application and Operations at SAM Asset Management, which provides the research for the Dow Jones Sustainability Index, noted that leading companies are now starting to “get” the financial benefits of sustainability. Tjerk Huysinga, Shell’s Vice President of European Investor Relations, said the rising interest was reciprocal. He noted how engagements with investors were now much deeper compared with six or seven years ago when, he said, the oil major sometimes had difficulty in finding attendees for its SRI investor roadshows.
Huysinga sounded a warning, however, on the ESG/CSR reporting theme of the day, saying that it could have the perverse effect of a loss of transparency to investors, and, potentially, a lot of litigation.
Marcel Jeucken, Head of Responsible Investment at the €121bn Dutch pension fund manager, PGGM, said he had also noted a “massive change” in company-investor relations in the past six years, notably in sectors such as extractives where the risks are high.

Ric Marshall, Chief Analyst at GMI Ratings said the “forced dialogue” of say-on-pay in the US was starting to pay dividends: “Companies are now doing things that we’ve been recommending, frankly, for decades.”The difficulties of governments partnering with investors was the focal point for an afternoon environment (E) panel looking at green infrastructure, green bonds and asset-backed structures. Nick Silver, Co-founder and Chief Actuary of the Climate Bonds Initiative, said the withdrawal of feed-in tariffs by governments in different areas of renewable energy production had made investors sceptical about the political climate for related investments.
He said the initiative was working on ways to circumvent the problem, with one potential solution being the creation of policy risk insurance akin to cover that is already issued by the World Bank and the European Investment Bank.
Robin Edme, Senior Advisor Responsible Finance, Office of the Commissioner-General for Sustainable Development, French Ministry of Ecology, Sustainable Development and Energy, said the French government was currently preparing a white paper on the issue and that one consideration would be whether policy around relevant public/private partnerships should be constructed outside of the usual government election cycle to avoid the political impasse.

Gerard van Baar, Managing Director, Finance and Sustainability, Holland Financial Centre, said the country’s Green Investment Company (GIC), could help bypass political and economic barriers to such public-private partnerships by including both the Central bank and various government ministries from the off, although he noted that the entity was awaiting instigation from the new Dutch government.

The GIC will look at the potential for government partnerships on co-financing, mezzanine structures, guarantees and risk capital arrangements, he noted, while facilitating the bundling of small-scale projects into a larger format that appeals to institutional investors. Donald Macdonald, Chair of the Institutional Investors Group on Climate Change and a Trustee of the BT Pension Scheme, said a similar initiative was taking place in the UK in tandem with the Green Investment Bank to channel public/private money into environmental infrastructure in developing countries.
He explained that the IIGCC is involved in discussions with the UK government Department on Energy and Climate Change (DECC) via the Capital Markets Climate Initiative (CMCI), a government-sponsored initiative. He said the idea was to get investors to partner with government and transnational finance groups such as the International Finance Corporation where the latter could, for example, take small stakes that could cover the development risk for investors.
The final plenary session of the conference considered the near-term challenges for responsible investment. David Russell, Co-Head of Responsible Investment at the Universities Superannuation Scheme (USS), said he believes the investor emphasis would continue to be on governance issues and not on environmental or social factors. “Asset managers are very good at understanding how poor boards can influence their investments, so they engage on that. But the ‘E’ and ‘S’ are viewed as being OK until they’re not. The problem isthat the market, as a reflection of society, is not putting a value on these issues as it should do.”

Matt Christensen, Global Head of Responsible Investment at AXA Investment Managers, said that following an 18-month study, the firm had determined that undervalued firms with good governance greatly outperformed those with bad governance (40% per annum versus 0.3%). But he said AXA IM had also found that oil, gas and mining firms that took employee health and safety seriously outdid those that did not (21% per annum against 3%). Eric Borremans, Head of Development – Sustainable Investments at BNP Paribas Investment Partners, agreed with Russell that demand for broad ESG integration across institutional assets was still not very widespread. But he noted that SRI had its beginnings as a supply- not demand-driven theme and that the onus remained on the sellers of product to find ways to make ESG more mainstream. Remy Briand, Head of MSCI Index and ESG Research, said he sensed a “disconnect” between what was happening in society and what was happening in the financial industry around sustainability. While consumers understood the importance of conservation or drove hybrid cars, he said, the finance industry was still dealing with the challenge of how sustainability could be integrated into products: “Although I think there would be demand for it, you can’t expect a retail investor to say I want a fund with good corporate governance practices. We in the financial industry should find a way to resolve this.”